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Market Wrap

Buying Opportunity Ahead?

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       11-8-2001            High     Low    Volume Advance/Decline
DJIA     9587.52 + 33.15  9721.75  9558.39  1.5 bln   1681/1421
NASDAQ   1827.77 -  9.75  1888.39  1816.56  2.2 bln   1824/1789
S&P 100   576.62 +  2.98   584.49   573.64   Totals   3505/3210
S&P 500  1118.54 +  2.74  1135.75  1115.42
RUS 2000  439.06 -  1.74   446.11   438.49
DJ TRANS 2320.98 + 13.48  2335.20  2304.04
VIX        29.91 -  0.56    30.39    28.20
VXN        58.75 +  1.55    59.57    55.27
TRIN        1.09
Put/Call Ratio       .73

If you listen to stock TV you could be really worried about the next few weeks. Analysts abound that are building not a wall of worry but a mountain of worry for investors to climb. Are they right or wrong? Rumor has it that Barton Biggs from Morgan Stanley went so far as to attend a sťance to attempt to find out future market direction. Anybody got money with Morgan Stanley?

All over or just all over the charts? With the demise of the new bull market the topic of conversation on trading desks everywhere do you get the feeling that you missed something important? I do! What happened to investing for the future? What happened to the 2Q recovery? For those of you that are poised to move to the sidelines in despair I dedicate this commentary.

To begin the day the new jobless claims came in significantly less than expected at only 450,000. A surprise to analysts that expected another 500,000 week. The four week moving average also fell but the continuing claims, those out of work for more than a week, rose by +34,000 indicating that new jobs were still hard to find. This was the lowest level in six weeks for new claims while the continuing claims was at the highest level in 18 years. Still the positive surprise in the declining number of layoffs could be yet another ray of sunshine from our economic future.

The good news continued with the October Chain Store Sales which at +2.3% more than doubled the September number and showed that consumers were returning to the shopping malls as we near the crucial holiday season. Discounters and wholesale stores continue to lead the league as the more pricey stores were feeling the impact of layoff pressures. More people are shopping Wal-Mart, Kmart, Sams and CostCo than Saks and Ann Taylor? Imagine that! Wal-Mart almost single handedly held up the retail sales numbers with a +6.7% same store sales while specialty apparel stores fell -7.8%. The Gap and Abercrombie & Fitch posted some of the weakest numbers for the month.

The good news was bolstered at the open by a 50 point rate cut by the European Central Bank and the Bank of England. The dual cut on top of the better than expected economic news surprised the markets and a +170 point Dow romp was underway. A reality check as the day progressed prompted the generals who had driven the markets up to wonder what happened to the support troops.

The selling started when the minutes of the October Fed meeting were released and it was shown that the October 50 point cut was a unanimous decision. The Fed felt the economy was already in recession but also felt that the current stimulative policy as well as economic packages being discussed would return the economy to its maximum potential rate of growth by late 2002. The recovering consumer confidence was crippled by the attack causing concern by the Fed over the delay in that pending recovery. They said that business investment in equipment and software was deteriorating rapidly during the summer over concern about future sales and earnings. A bright point was inventory liquidation, which was seen as progressing in an aggressive manner. What killed the markets was the outlook by the Fed that we may not have seen the bottom and the tech correction could continue in the near term. Remember this was from the October 2nd meeting.

The news from the minutes portrayed a Fed that was still very worried about our economic future in the near term but confident that the economy would rebound strongly in 2002. They appeared ready to cut rates again in Dec/Jan and the Fed funds rate could actually hit the discount rate of 1.5% by late January. Traders were faced with possibly weaker conditions than they expected and the markets sold off on profit taking while the news was digested.

Further pressure on tech stocks was a statement from AMD that said revenues in the 4Q were expected to be flat or up only slightly. They said unit sales were approaching record levels but pricing pressure was very strong and could impact profitability going forward. Analysts did not expect them to be profitable in 2002 but AMD said that IF inventory excesses worked out and IF the economic recovery commences and IF average selling prices of memory chips stabilized and IF they could cut expenses by -40% in the 4Q they could make 2002 a profitable year. Anybody want to take that bet? AMD dropped over -$2 from the $14.67 high of the day.

Another factor for the sell off was a deadlock in the debt restructuring talks in Argentina. Everything appears to now be on hold until next week and a default is expected if the delay continues. While this is generally already priced into the U.S. markets it is still an attention getter that worries traders who remember Russia, Brazil and other past currency problems.

So what is an investor to do? Fight the Fed and ten aggressive rate cuts with more to come? Everyone knows that the economy is in the tank so no new news here. Almost every economic tidbit points to a 2Q recovery and if that is true then now is the time to buy stocks. This does not mean that there is not another buying opportunity in our future. I said on Tuesday that profit taking could be in our immediate future and recommended buying any dip to 9500. The next day saw a drop to 9522 which was immediately bought by investors. The Dow closed today at 9587 after breaking over 9700 intra-day. It would be nice to think that the six day rally on the Dow and the eight day rally on the Nasdaq could be topped with a one day intra-day -140 point drop from the highs to allow profit taking to occur. Don't hold your breath.

As the TV commentators have driven into investor consciousness all day the semiconductor index was up +56% from its lows at the high of the day. If ever there was an advertisement for profit taking this was it. Still leaders like AMAT might have lost ground but it only pulled back to immediate support from two days ago. NVDA which had been up for seven days dropped a miniscule -.88 to return to Tuesday's lows. BRCM dropped a whopping -$4 from the highs of the day but still finished positive and well above support from Tuesday. What is the point?

The point is the markets did pull back from their highs on profit taking but only to recent support even in the sector with the most profit. There is still an underlying strength that has not been touched. Volume soared to 1.5B and 2.2B respectively and advancers beat decliners at the close. Friday's economic reports should be market positive and there is still a lot of money on the sidelines ready to buy any dip. Put in perspective the Dow pulled back -140 points from its intra-day high but is still up almost +600 points since the Nov-1st lows. Not a bad performance in my book. Support is light at 9550 with much stronger support at 9400. How ready are traders to sell winners? IBM hit a new high of $115.56 today and a +$27.51 gain since the Sept lows. It pulled back from that high to close just under $114 for a FOUR cent loss. That is pretty bullish in my opinion.

Will there be profit taking in our future? Absolutely! That is why they made stop loss orders. Will it be Friday? It is possible but in my opinion the only way to spell "profit taking" from this point forward is "b-u-y-i-n-g o-p-p-o-r-t-u-n-i-t-y". All aboard! The train is leaving and any bumps you feel over the next couple weeks will be bear carcasses under our wheels.

Take profits on weakness and buy the dips!

Jim Brown

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